J.P. Morgan Chase to Pay $2.2B in Enron Settlement

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JPMorgan Chase & Co. agreed to pay $2.2 billion as part of a broad settlement with investors stemming from its role as an investment banker to Enron Corp. The deal comes less than a week after Citigroup agreed to pay $2 billion to settle Enron shareholder claims.

The Board of Regents of University of California, the lead plaintiff in the case, alleged that JPMorgan Chase and other defendants set up false investments in clandestinely controlled Enron partnerships and used offshore companies to disguise loans and facilitate phony sales of phantom Enron assets. As a result, added the university, Enron executives were able to deceive investors by reporting increased cash flow from operations and by moving billions of dollars of debt off Enron’s balance sheet, thereby artificially inflating securities prices.

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“This agreement represents an extremely important and very substantial recovery for Enron investors and sustains the course of highly favorable settlements,” said James E. Holst, the university’s general counsel, in a statement. “JPMorgan Chase and its advisors have acted very responsibly in reaching this settlement. We will now move ahead with our objective of additional large recoveries from the remaining defendants, either through settlement or at trial.”

J.P. Morgan Chase stressed the settlement does not include any admission of wrongdoing. “We are working hard to put the uncertainty of litigation risk behind us,” said chairman and chief executive officer William B. Harrison Jr., in a statement. “By settling this case and increasing reserves for our remaining legal issues, the firm can better focus its energies on building our great company and serving our clients and shareholders.”

Fifteen months ago, the banking giant agreed to pay $2 billion to settle claims related to two bond offerings for scandal-plagued WorldCom Inc. At the time, we noted that the JP Morgan agreed to pay was higher, on a percentage basis, than the rate established in an earlier settlement with Citigroup, a co-lead on the WorldCom bond offerings, and much more than the $1.4 billion lenders were reportedly willing to take in an earlier proposal.

The settlement is subject to approval by the university regents, the J.P. Morgan Chase board of directors, and the U.S. District Court for the Southern District of Texas.

Including this $2.2 billion settlement, the university stated that it has obtained more than $4.7 billion for Enron investors, including $2 billion from Citigroup, $222.5 million from Lehman Brothers, $69 million from Bank of America, $168 million from Enron’s outside directors, and $32 million from Andersen Worldwide. The university added that it will secure a distribution of approximately $32 million for investors through the bankruptcy proceeding for the LJM2 partnership involved in the Enron scheme.

William Lerach, the lawyer representing the University of California, told Reuters that he expects the total payout to exceed the $6.1 billion agreed to by more than a dozen Wall Street banks stemming from their role in the fraud at WorldCom. Remaining defendants in the Enron investors’ lawsuit include Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Barclays Bank, Deutsche Bank, Toronto-Dominion Bank, Royal Bank of Canada and the Royal Bank of Scotland.

However, given the plaintiffs’ allegation that Enron investors suffered an estimated $40 billion to $45 billion in market losses, those investors will eventually recover just pennies on the dollar.